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Analysis EO
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Analysis EO
Jul 16, 2020 07:30 pm ·

ByteDance's Next Potential Weapon to Threaten BAT: Chip

► As chips have been a hot spot where BAT names can be found moving hard and fast, following in the steps of the leading three tech giants is a tempting strategy.  ► New business representatives are always specially involved in new national policies such as 'new infrastructure.' As a result, ByteDance has no reason to miss the chip industry, an area supported strongly by the government. ► Internet giants are continuously looking up new initiatives that may form the next direction, such as Cloud services and IoT, so the chip industry which is already grabbing attention is expected to be the next focus as the US intensifies a ban on Chinese high-tech enterprises. ► ByteDance recorded CNY 150 billion in revenue in 2019 with a compounded annual growth rate of 178.8%, indicating sufficient capital support to invest chip in the next couple of years. ► The company might have high intentions for research on chips due to their money-making products needing better support for data processing. For instance, killer apps such as Douyin and TikTok, which have a massive user base, have rising requirements for data processing. With self-developed products such as smartphones – developing fast through the acquisition of Smartsan and brands in the gaming industry – the company is exploring triggered demand as well. As Huawei's 5G networks are taking shape, the US is intensifying its ban on the tech giant, claiming that any company that uses American technology is prohibited from providing services to Huawei. Along with prior restrictions on ZTE and other companies showing up on the 'Chinese entity list,' the new interdiction is undoubtedly a heavy blow to China's lagging chip industry. China imports chips at an increasing rate, recording USD 312.1 billion in 2018, while the US supplies nearly half of the world's chips. With a high entry barrier and massive investment, the chip market has been monopolized by a few developed countries such as the United States, Japan and South Korea. Invading into the chip field seems an attractive way for Chinese star firms to shine on the global stage. ByteDance, a unicorn with a USD 75 billion valuation, has always engaged in global strategy. In 2019, the company applied for a digital banking license in Singapore, expanding its business in Southeast Asia. As of April 2020, TikTok, a short video platform, exceeded 2 billion global downloads, surpassing YouTube to rank seventh among all apps. Besides, on June 1, 2020, Kevin Mayer, the former Disney chief strategy officer, joined ByteDance and was in charge of the global department. ByteDance has achieved what its ‘predecessors’ the BAT companies have not – making a global product like YouTube and Facebook. As it has surpassed the BATs in telling an international story, ByteDance is now strong enough to enter the chip industry – either through acquisition or strategic investment, in our view.  Inferring from BAT and ByteDance's past layout in each industry Founded in 2012 and has rushed to the forefront with its short video platform TikTok, ByteDance is committed to comprehensive development and ambitious growth, eating from each slice of the cake that BAT brands have already carved up, including messaging, education, healthcare, gaming and SaaS. ByteDance seems to be on the heels of Baidu, Alibaba and Tencent all at once. After seeing the top three internet giants' layouts in the chip industry, the technology-driven company is eyeing the chip market. Follow up the national new policy In March 2020, the Chinese government proposed a 'new infrastructure,' including 5G station construction, UHV, high-speed intercity railway and urban rail transit, new energy vehicle charging piles, big data centers, artificial intelligence and industrial Internet. After the release, Tencent (00700:HKEX) announced that it would invest CNY 500 billion in the next five years while Alibaba (BABA:NYSE, 09988:HKEX) claimed it would input CNY 200 billion in next three years. Baidu (BIDU:NYSE) has announced that, by 2030, the number of Baidu's intelligent cloud servers would exceed 5 million to fill out the new infrastructure. At the same time, ByteDance officially established an IoV team, planning to launch its vehicle infotainment system solution. Combined with a huge traffic entrance backed by TikTok and Jinri Toutiao, ByteDance's big data and algorithm technology has a good chance of catalyzing the development of autonomous driving. To get rid of dependence on foreign technology, China implemented tax reduction policies for chip manufacturers in 2018, followed by a USD 29 billion investment to support the chip industry in September 2019. To respond to national policy, BAT successively laid out as well, such as Alibaba's PingTouGe, a self-developed semiconductor company. From this perspective, ByteDance, ambitious to replace BAT's B, has no reason to miss the chip's prospect. Investors have been looking forward to the company's new initiatives Seeing that e-commerce business was getting mature, Alibaba launched Ali Cloud in 2009, aiming at a 'big data + cloud computing' strategy. Ten years later, cloud services have long become a must-have for major Internet companies such as JD.com and ByteDance, while Alibaba generated cloud revenue of CNY 35.525 billion in 2019. According to IDC, Alibaba Cloud's market share in the intelligent voice field reached 44% in 2019, ranking first in China, followed by Amazon AWS. Xiaomi reached its peak in the mobile phone business in 2014 and began to layout the IoT industry to develop Xiaomi’s ecological chain. After five years, the IoT segment accounted for around 30% of revenue. Xiaomi won the largest market share in the TV industry in the domestic and Indian market and became a global championship in the wearable devices field. With the advent of the 5G era, the IoT market will shape the next boom in hardware. As the US cracked down on Chinese high-tech companies, especially Huawei, domestic replacement chip has regained attention. The chip industry is now at the center of a storm of uncertainty but has high potential to become a hot growth spot shortly, as cloud computing and IoT develop. Tesla (TLSA:NYSE) and the BATs have broken into the chip industry sooner or later. With the gradual saturation of the number of TikTok users and the blockade of the platform in markets such as the US and India, for ByteDance, why not turn towards such a promising industry as a new profit engine? Sufficient capital supports chip R&D The chip industry is a money-burning one, from IC design to the foundry to packaging and testing. As a result, many chip companies have gone bankrupt one after the other due to broken cash flows. Internet giants are unable to finish the whole process. However, they can invest in semiconductor companies to follow high-tech trends – and developing relatively easier AI chips seems reasonable, as per the example of Alibaba. Alibaba established the PingTouGe semiconductor company in 2018 when the e-commerce behemoth had reached CNY 300 billion revenue. One year later, the firm released the first AI chip, 'Hanguang 800,' which has been used in multiple scenes such as video image recognition and search function in Taobao. Alibaba expects the chip to be used in medical imaging and autonomous driving in the future. ByteDance generated revenue of CNY 150 billion in 2019 with a compounded rate of 178.8%, faring exceeding BAT's revenue growth rate. Following this trend, ByteDance has a high potential to catch up with BAT in terms of earnings, seeing more than CNY 300 billion in the next two years. With sufficient capital support, the technology-driven company should be able to develop its own AI chips – not accounting for strategic investment in semiconductor companies. Huge user base and self-developed products drive chip demand Multiple successful examples support this position. 1) Ali Cloud thrives from its large e-commerce and third-party payment platform data pool such as Taobao and Alipay. 2) Baidu Apollo’s success relies primarily on the user's data. 3) Tesla's self-developed chips derive from its autonomous driving system. From this perspective, new initiatives have always been triggered by existed businesses and products. When ZTE was banned by the United States in 2018, Yang Zhen, ByteDance Vice President, said "ByteDance has billions of users worldwide that upload videos that need to be analyzed and processed in TikTok. And this process means the purchase of a large number of chips." If the smartphone plays or records video for too long, the phone is likely to overheat. Therefore, the need to improve video performance and reduce power consumption triggered the motivation to develop AI chips. There is a rumor that Douyin is working with Aegis, a fingerprint identification IC factory, to develop AI chips. The product is expected to win orders from major smartphone manufacturers such as OPPO, Vivo and Xiaomi (01810:HKEX). Besides, ByteDance acquired Smartsan's partial business in 2019 to launch smartphones. To avoid repeating Huawei's misfortune, applying the self-developed AI chip to the self-developed mobile phone seems attractive. Whether from the perspective of strategic layout or capital requirement, the allure of chipmaking for ByteDance is too attractive to miss.

Analysis EO
Analysis · 2
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Analysis EO
Jul 10, 2020 11:39 am ·

Time for BAT and TMD to Hit the Driverless Car Road

► The large addressable market and potential revenue synergy is luring BAT (Baidu, Alibaba and Tencent) and TMD (Toutiao, Meituan Dianping and DiDi) to join the driverless car game. DiDi's in-house Autonomous Vehicle (AV)  in Shanghai is accelerating the adoption curve and also heating up the game, making the rest of the names and startups at times breathless.  ► Pure-tech companies in the area have technology solutions but are struggling to step into the growth/mature stage – and with the unviable business model are exposed.  ► The funding market has been cooling down for a while, with some unicorns suffering without new support. Investors are asking for more – and autonomous driving startups suffered most.  ► As massive – in terms of scope, size or capacity – Level-4 AV deployments are at least four to six years ahead, a ticket to the Internet giants' boat is not a bad exit.  2020 was an eventful year that saw increased AV adoption across some tier-1 cities  China saw several Level-4 major deals closed in the first half of this year – DiDi AV spinoff (USD 500 million), Pony.ai (USD 462 million, Series B), Inceptio.ai (USD 100 million).  The descending enthusiasm of investors could have resulted from the repeatedly postponed commercialization timeline of AV technology. Both giant companies like Google's Waymo and ambitious startups as Momenta once claimed that they would materialize mass production of Level-4 autonomous driving vehicles by 2020. Yet, no single company has realized the goal, due to immature technology, stubbornly high costs and inadequate regulations.  While the investors are getting more discreet on their bets, their expectations remain high. Though the number of deals lessened in the past two years, the volume of money raised in each deal is getting higher. At the beginning of this year, Chinese AV startup Pony.ai secured USD 500 million from Toyota, yet another industrial investor following Kunlun (300418:SZ) – a gaming company. The injection will sustain the firm's research on L4 in the coming years but might harm the company's independence, in our view.  L4 tech solutions providers need to reconsider their role – RoboTaxi operator, self-driving car maker or tech providers. Choosing the latter means they only earn licensing fees.  It might be hard for driverless technology alone to take a majority portion of ride-hailing trips while the rest relies on customer service, as Waymo executive John Krafcik implied. Leading companies have been operating their driverless fleet in China on a small scale. For instance, WeRide reported a total of 8,396 orders of its RoboTaxi service to Guangzhou citizens, in December 2019. However, point-to-point operations in some urban areas are still the initial stage of commercialization.  Like Waymo, Chinese VC Blue Run Capital expressed a similar opinion. OEMs, software integrators and channels surrounding the core OEMs are their priority for opportunities of artificial intelligence (AI). OEMs integrate upstream, downstream and third-party resources efficiently. In the direction of AV, those who focus on parts of the value chain can fonds the course hard, as one closes the loop of demand and supply, creating less value. The company has invested in Lixiang four times, the next being – maybe – China EV stocks after NIO (NIO:NYSE).  Who's the next in Internet giants' shopping bags? Internet/industrial conglomerates have an endless appetite for cutting-edge technologies due to the fear of missing out (FOMO). Their deep pockets support the money needed for acquiring the share of a business when they feel there can be a possible revenue synergy going on.  In the auto industry, whose history is almost a history of M&As, we saw many mega-deals happen in the past five years. Chipmakers and tier-1 suppliers – sensitive to the shifts of world science and technology – are engaging in the game. Intel's USD 15.3 billion acquisition of Mobileye and Delphi's several deals is a clear sign. Pure-tech companies that have technologies but are struggling to step into the growth/mature stage and find the unviable business model are being exposed. A leaf in the storm  We view DiDi's driverless service launch in Shanghai as a significant milestone for the auto industry and, at the same time, a considerable challenge to startups in the same vein. DiDi's peers – not smaller ones in the ride-hailing niche but tech giants – will react accordingly, as the cost of missing new chances may be infinite, just as Baidu missed the opportunity of mobile apps and content recommendation in the 4G era.  The large addressable market and potential revenue synergy is luring BAT (Baidu, Alibaba and Tencent) and TMD (Toutiao, Meituan Dianping and DiDi) to join the driverless car game. Meituan, for instance, has been developing and investing in last-mile delivery AVs to better support its food delivery segment. Its new bet on Lixiang shows its ambitions in networked mobility as well.  The greatest strength for Internet giants to rule the AV business is the solid user foundation created by their primary business. ByteDance (BD), for instance – the Daily Average User (DAU) of its hottest app, Douyin (China’s counterpart to TikTok), reached 400 million as of January, the number having hit 900 million during China's lockdown. The advantage that BD has on traffic entry and its intelligent recommendation systems is paving the way to the Internet of Vehicles (IoV). It will take full advantage of in-car times of drivers and passengers by providing short-video content and expects to commercialize from advertising.  Alibaba has made a presence on the upper stream, investing/building ventures of HD map (AutoNavi) and IoV/V2X (Banma Network). E-commerce giants like Alibaba and JD.com all research on autonomous long-haul freight where L4 Autonomous Truck companies like TuSimple Inceptio and Plus.ai leads the game.  The bottom line As DiDi shows a clear mission to envisage itself as operating fleets of autonomous robotaxis in the next ten years, BAT and TM need to consider engaging more in the game. The need to understand who develops owns and operates the driverless robotaxis or trucks and the surrounding systems, and further, how their advance computing capabilities will help or hinder their entry into the market with their more-than-ten-billion customers, is crucial. They can provide the whole autonomous network with the required infrastructure and best customer experience and move the needle for the autonomous driving industry. 

Analysis EO
Analysis · 2
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Analysis EO
Jun 23, 2020 09:08 am ·

China’s ‘618’ Shopping Festival 2020: Huawei and Xiaomi Dominate on Tmall

► Against the backdrop of lavish subsidies and the rapid development of livestreaming technologies, Tmall held the biggest-ever 618 shopping festival. ► Huawei and Xiaomi were comfortably ahead of other Chinese vendors in the 618 festival in terms of smartphone and wearables sales.  ► Huawei showed an abundant strength in products and consumer coverage, outplaying Xiaomi and other vendors. ► Appliance maverick GREE triumphed through its CEO’s livestreaming stunts, bringing a potential threat to Huawei and Xiaomi’s IoT strategies. Tmall, an e-commerce platform operated by Alibaba Group (BABA:NYSE), once again led the 618 Shopping Festival, with a CNY 698.2 billion gross merchandise value (GMV). The first hour of June 18 witnessed a 100% Y-o-Y growth in transaction volume. Two engines drove the consumption craze. First, to boost the economy, Tmall, along with other leading e-commerce platforms such as JD.com (JD:NASDAQ) and Suning (002024:SZ), handed out shopping vouchers generously at a CNY 10 billion level. Second, more widely applied livestreaming promos for makeup, clothing and 3C (computer, communication, and consumer) electronics products, lifted the sales to an even greater volume. Some had anticipated a downturn caused by quarantine or people’s reluctance of going to crowded malls – rather the opposite came to pass. A currently shrinking electronics market was actively seeking its redemption during this shopping festival, however a more intense level of competition was waiting for all players. Apple (AAPL:NASDAQ), the world-leading electronics giant, joined the shopping festival on Tmall for the first time. Chinese electronics vendors such as Huawei and Xiaomi (01810:HKEX) didn’t want to be outdone as well, thus the marketing events stimulated people’s purchase desires with bare stops. For the full category sales, Huawei and Xiaomi achieved thrilling results, taking the first and second position among main Chinese electronics players in Tmall sales respectively and leaving the third far behind, with approximately CNY 1 billion extra sales. The sales of OPPO and vivo (OV) somehow stumbled this year, based on data from Tmall provided by iyiou.com, a sister publication of EqualOcean, as the two vendors did not release their official numbers for the shopping festival. It is likely that, no matter how polished one’s promotional statement is, it cannot make up for the downward slope in sales. Pushed by the pandemic, OVs had to shift their sales from offline to online, which required a bit more time for them to adjust. In terms of smartphones and smart wearables, the data reveals a cozy duopoly for Huawei and Xiaomi. For the smart wearables, other players such as Samsung, Huami and OPPO still have a chance of bouncing back to the top, since the wearable market in China still has a large group of new users compared with the smartphone market.  Though the 5G data and related applications have not yet shaped 5G smartphone as a necessity, the phones featured for this tech have already occupied the peak of new sales. Apparently, the demand is shaped by vendors’ tricky promotion on the new generation of communication technology. Huawei and Xiaomi somehow presented a subtle switch in terms of product layout. Xiaomi in 2020 changed the strategy of smartphones to a concentrated product route while Huawei seems to have a broader price coverage and target customer groups. Xiaomi’s Mi 10 and Redmi K30 are the only two specs that have taken most of the promotion resources. For Huawei, Y series, P series, Nova series and series under the Honor brand are all indulged by the company’s marketing department and the customers, covering unit prices from under CNY 1,000 to 7,500. Xiaomi’s overall production and sales capacity is dragging its performance behind Huawei, as it won the solid second position only by two specs.    Chinese brands did a fairly great job in terms of home appliances. The top 3 positions are all taken by Chinese vendors – GREE, Haier (600690:SZ) and Midea (000333:SZ) – and left a CNY 1 billion sales gap for the fourth brand, Siemens. GREE should credit the sales boost in this year’s 618 to the livestreaming hype. GREE’s CEO, Ms. Dong Mingzhu, has been actively practicing livestreaming sales since April this year. After a two-month phase of testing and improvement, CNY 17.8 billion of sales were achieved through her five 618 livestreaming events. The 618 sales of 17.8 billion in 2020 represent approximately 10% of GREE’s total revenue in 2019, marking a true breakthrough in the livestreaming era. Midea’s top managers followed GREE’s footsteps with a populist attendance in livestreaming activities. However early birds are the ones to enjoy the worm – and Midea does not seem to overachieve in online promotions. The strong branding still supported Midea and Haier with decent sales. The top 3 appliance vendors still showed a strong competitiveness, which brought potential threats to Huawei and Xiaomi’s IoT and smart home strategies. 

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